Week 6 - Lecture 6 Flashcards
What are current assets?
Assets expected to be used or consumed within 12 months.
What are non-current assets?
Assets used for longer than 12 months.
Define carrying amount (book value).
The value assigned to assets or liabilities on the balance sheet, often involving estimates and assumptions.
What is historical cost in accounting policy choices?
Asset recorded at the original price paid.
What does current value represent?
Reflects the asset’s market value or the cost to replace it at the measurement date.
Define current cost.
Replacement cost.
What is fair value?
Market price for selling an asset or transferring a liability.
What does Accounts Receivable represent?
Money owed by customers.
What is the Allowance for Doubtful Debts?
A contra-asset reflecting the expected uncollectible amount.
How is the carrying amount of Accounts Receivable calculated?
Accounts Receivable - Allowance for Doubtful Debts.
What is the aged debtors analysis method?
Older debts are more likely to be uncollectible.
What does the percentage of credit sales method entail?
A fixed percentage of total credit sales based on past experience.
What is risk classification in estimating allowance for doubtful debts?
Classifying each debtor by risk level.
If Accounts Receivable = $38,000 and one customer with $8,000 is going bankrupt, what is the Allowance for Doubtful Debts?
$8,000.
How is Net Accounts Receivable calculated in this scenario?
$30,000.
How is inventory valued?
At the lower of cost or net realizable value (NRV).
What constitutes the cost of inventory?
Purchase price + shipping and handling costs.
Define net realizable value (NRV).
Estimated proceeds from the sale minus estimated selling costs.
If inventory cost = $17,000 and NRV = $15,000, how is the inventory valued?
$15,000.
What is the Weighted-Average Cost method for inventory?
An average cost per unit is used for all inventory.
What does FIFO stand for, and what does it assume?
First-In, First-Out; assumes the oldest inventory is sold first.
What does LIFO stand for, and what does it assume?
Last-In, First-Out; assumes the most recent inventory is sold first.
What impact does FIFO have during periods of rising prices?
Gives higher ending inventory and profit.
Why is LIFO not allowed in Australia?
It results in lower profits and inventory during the same period.
How is the cost of Property, Plant, and Equipment (PPE) calculated?
Purchase price plus all necessary costs to bring the asset into use.
How is PPE generally valued after acquisition?
At cost minus accumulated depreciation.
What is Straight-Line Depreciation?
Equal depreciation expense each year.
Define Diminishing Balance Depreciation.
Larger depreciation expense in early years of asset’s life.
What is Units of Production Depreciation?
Depreciation based on asset usage, like miles driven or units produced.
Calculate annual depreciation for a coffee machine purchased at $4,225 with a 3-year useful life and a residual value of $325 using Straight-Line Depreciation.
$1,300.
What effect does depreciation have on financial statements?
Reduces the carrying amount of an asset and the business’s profits over time.
What happens when a depreciable asset is sold?
The depreciation and the gain/loss on sale must be recorded.
True or False: A gain is recorded if an asset is sold for more than its carrying amount.
True.
True or False: A loss is recorded if an asset is sold for less than its carrying amount.
True.
Calculate Net Accounts Receivable for Sales Max company with credit sales of $3,500 and uncollectible debts estimated at 2%.
$3,430.
What are the three methods for inventory valuation based on cost flow assumptions?
- FIFO
- Weighted Average
- LIFO
